With 80% of its onshore drilling rigs equipped with its FlexRig advanced drilling technologies, Helmerich & Payne may be one of the few oilfield services companies with the ability to grow in the declining American land market, thanks to its ability to extract oil from traditionally difficult-to-reach places. The company's 193 rigs are deployed across the U.S., throughout South America and across the sea in Tunisia. H&P also has a small offshore segment which operates exclusively in the shallow Gulf of Mexico. This means the company has little hope of expanding into the competitive offshore market, since most Gulf E&P companies are moving abroad because of declining production; it also means that a relatively small portion of the company will suffer from that trend. Onshore, the company's FlexRig technology allows it to benefit from growing demand for unconventional drilling and productivity-growth technology, as it can drill wells to reserves that were previously impossible or uneconomical to get to. Furthermore, rising oil prices are driving up dayrates for these coveted pieces of capital equipment, causing H&P's margins to grow as well as its revenues. H&P competes with other American onshore drilling companies, including Nabors Industries, Patterson-UTI Energy, Grey Wolf, Unit, and Pioneer Drilling Co.
Helmerich & Payne is an oilfield services company specializing in onshore drilling, though the company does have a small offshore segment. Of the company's 193 rigs, 157 are deployed onshore United States, 27 are deployed onshore internationally, and 9 are offshore in the Gulf of Mexico. 80% of the company's onshore rigs are FlexRigs, which are highly mobile, with different advanced drilling technologies, making them useful in unconventional oil fields like oil shales. Most of its international operations occur in South America, in Argentina, Bolivia, Columbia, Chile, Ecuador, and Venezuela; the company also has a rig in Tunisia.
Operating revenue grew from $1.2 to $1.6 billion between 2006 and 2007; in the same period, operating income increased from $294 million to $449 million.
|U.S. Onshore Rigs|
|International Onshore Rigs|
|U.S. Offshore Rigs|
Oil and gas prices have fluctuated heavily over the past few years, though since mid-2007, the trend has been up. Oil futures traded on international markets for $120/bbl in early May 2008, a record high, while natural gas traded at over $10/Mcf. With oil prices so high, E&P companies are desperate to ramp up production, causing demand (and dayrates) for drilling rigs to skyrocket. Between 2006 and 2007, H&P's average land rig utilization fell from 99% to 97% while its offshore average rig utilization fell from 69% to 65%. At the same time, operating margins increased from 24% to 27.5%, illustrating how rising dayrates can drive up income despite decreases in productivity.
With oil prices so high, E&P companies are desperate to ramp up production, causing demand for drilling rigs to skyrocket. In the U.S., however, many of the large, onshore, conventional reserves are maturing, causing production to decline. One major indicator of declining reserves is a short-term increase in rig count, as companies start both looking for new reserves and trying to ramp up production at existing fields. As of April 25th 2008, the U.S. had 1,842 land rigs, an increase of 95 from April 25th 2007. This increase in rig count keeps dayrates for onshore drilling companies from increasing as much as they might if the number of rigs stayed constant. Some onshore drillers, in fact, have actually experienced declining dayrates, despite high oil prices because their rigs offer no specialized technologies, and so are useless in the declining American conventional land market.
H&P has been able to avoid declining onshore dayrates, however, thanks to its fleet of specialized land rigs. Almost 80% of H&P's land fleet consists of FlexRigs, specially-designed mobile onshore drills that have unconventional drilling technologies, like the ability to drill shallower wells or effectively extract from oil shales. Demand for these rigs has actually increased; despite the fact that utilization fell slightly between 2006 and 2007, the number of H&P rigs actually increased from 113 to 157, so the drop was probably related to structural issues of bringing the rigs online. Furthermore, H&P's FlexRigs are being demanded at the few fields in the U.S. at which production is expected to grow rather than decline. For example, H&P is one of three companies that provides 91% of EOG Resources' rigs in the Barnett Shale, and, along with Nabors Industries, provides 50% ConocoPhillips' rigs in the Gulf Coast region. As conventional, easy-access wells in the U.S. mature, demand for H&P's fleet of high-spec FlexRigs will continue to grow.
H&P has nine conventional drilling platforms, its entire fleet, in the shallow-water Gulf of Mexico. Historically, the Shelf has been a key producer of U.S. oil and gas; in 2007, for example, it was responsible for 7.6% of U.S. oil production and 10.2% of U.S. gas production. These production numbers, though, are part of an overall decline in production rates since 2003. The Minerals Management Service (MMS) estimates that production in the region will fall from 329,000 barrels per day to 182,000 barrels per day in the next nine years - a decline of 55%, and a big reason why many of the oil majors are leaving the shallow shelf for deeper or international waters. Without deepwater oil exploration technology, which is the only sector of the Gulf that is thriving, H&P's offshore segment has little hope of surviving the move out of the Shallow Gulf.
Whether it’s because of the desire for energy independence, the rising price of oil, or fears of climate change, public opinion has turned away from petroleum, and is driving government policy changes that encourage the adoption of alternative fuels. Environmentalists have been calling for a shift to renewable energy for years, and though the river of change is running slow, it is running deep. The Energy Independence and Security Act of 2007 is the first step towards a grander series of changes. By forcing automakers to achieve 35 mpg by 2020 and setting a Renewable Fuel Standard of 36 billion gallons of biofuels in 2022, the Act has potential to get the ball rolling to greatly reduce American dependence on hydrocarbons.
Already, 26 states across the country have adopted Renewable Energy Standards to increase the share of renewables in their energy mixes, while both Democratic candidates for President have pledged to reduce carbon emissions by 80% below 1990 levels by 2050. While the Republican candidate isn't so tough on climate action, he still supports a strong cap-and-trade system. In emerging markets like China and India, the drive for economic growth supersedes environmental concerns, but since the world's largest oil importer is the U.S., meaning the majority of the oil drilled with H&P's rigs are sold to the U.S., a changing American environmental and energy paradigm would be disastrous to its business without the development of some effective carbon sequestration technology.
Offshore drilling is H&P's smallest segment; for the most part, the company competes with other onshore drilling companies.